Swapnil Sawant
Swapnil Sawant

Will M&As now become a preferred exit route for distressed businesses? Increased restructuring activity in 2024 seems to show that we may see more liability management exercises, innovative funding structures from private credit and equity players, and an increased use of M&A to resolve distress as market volatility heightens and interest rates remain elevated. Surging dry powder with private capital firms and an increasing appetite for more platform-level transactions have led to these investors looking to buy distressed businesses at cheaper or more affordable valuations. For sellers, too, this is an opportunity to exit lagging businesses and to focus on more profitable ventures. Now with a government, who has historically been more favourable to M&As, there is an expectation that such transactions will become the de rigueur and create a more dynamic ecosystem for stressed businesses.

Swapnil Sawant has been covering this trend at 9fin and seems to agree that M&As are now the new exit route to troubled businesses. An alumnus of Columbia Business School, he has worked in distressed investments for around a decade and has extensively covered news-worthy bankruptcies such as Spirit Airlines, Bed Bath and Beyond, WeWork and Party City among others.

"More assets are now coming to the market from private equity portfolios, assets divested by middle-market players and ABCs looking to liquidate some of the smaller scale businesses. Geopolitical uncertainty, interest rate remaining high and a possibility of a recession are all encouraging more sponsors to either opt for an LME or look for ways to generate liquidity in a fast and efficient manner.", he says.

Recent dealmaking estimates already show that an upswing is on the way. Stressed balance sheets troubled even further from decelerating demand in major industries has caused lenders and private equity sponsors to be on their heels for any opportunity to divest, restructure, or refinance.

In 2024, we already saw several noteworthy names land up on the restructuring tables. Many of these stressed companies could have been able to resolve their liability issues through M&A, but the general negative attitude towards any big-name acquisitions thwarted those plans. Case in point, Spirit Airlines. JetBlue saw an opportunity in the valuable assets of Spirit Airlines and made a bid for it, which was challenged by the Department of Justice almost instantaneously. Several of Spirit's airplanes were grounded in 2024 and 2025 due to Pratt & Whitney engine issues, which led to lower revenues and profits and a troubled balance sheet for the now bankrupt airline. A merger with JetBlue would have been able to provide a more stable operating environment and would have provided Spirit with the breathing space required to overcome the engine issues. However, the merger was blocked by a federal judge in Massachusetts after an extensive and well-covered trial. After it emerged from bankruptcy, Frontier Airlines again made a bid for it. "There is a hope that such transactions may get approved today", says Swapnil.

Another reason for the rise of distressed M&As is the growing presence of private equity firms in this space. "The influx of private equity and private debt in this space has been growing at a rapid pace. These players prefer to sell assets in an out of the court setting rather than go through the complicated and more expensive route of bankruptcy. Many businesses and assets that are getting sold these days come from private equity sponsors who would rather book a loss than spend fresh capital on dead assets", he states. Swapnil is now studying the trend of private capital flowing in distressed assets and hopes to see more private equity buyers as well along with sellers. "There have been many add-on acquisitions recently where the PE firms bought businesses that complimented their current portfolio for much cheaper prices, which is good for the market in general", he concludes.

Private credit players are also supporting this trend. With growing dry powder, they have the wherewithal to innovatively finance these deals led by PE sponsors and take an active role in shaping the distressed space. Many big name PE firms have already launched special situations funds such as Oaktree and Bain Capital Credit, which shows a growing enthusiasm for such transactions. Such lenders are also driving pre-packaged transactions wherein a deal is already stitched together which may involve divestments or new financing at attractive terms.

In conclusion, while restructurings have been on the rise for sometime, M&As may soon become a new force in the distressed space and everyone, from the industry leaders to middle market players, will stand to benefit from it.